FINA126 Quiz Questions

STUDY

PLAY

The net wealth of the aggregate economy is equal to the sum of all real assets all financial assetsall physical assets all real and financial asset none of the above.

A

The Sarbanes-Oxley Act ____________. requires corporations to have more independent directors requires the firm's CFO to personally vouch for the firm's accounting statements prohibits auditing firms from providing other services to clientsA and B are correct.A, B, and C are correct

E

A bond issue is broken up so that some investors will receive only interest payments while others will receive only principal payments, which is an example of ________.bundling credit enhancement unbundling financial engineering C and D

E

The value of a derivative security _______. depends on the value of the related primitive security can only cause increased risk. is unrelated to the value of the related primitive security has been enhanced due the recent misuse and negative publicity regarding these instruments E. is worthless today

A

Firms that specialize in helping companies raise capital by selling securities are called ________. commercial banksinvestment bankssavings banks credit unions all of the above.

B

Investment bankers perform the following role(s) ___________. market new stock and bond issues for firms provide advice to the firms as to market conditions, price, etc design securities with desirable properties all of the above none of the above

D

Which of the following financial assets made up the greatest proportion of the financial assets held by U.S. households? pension reserveslife insurance reserves mutual fund shares debt securities personal trusts

A

An ETF limits the diversification potential of investors who hold it. may be traded only in the primary market. is linked directly to the value of a composite index of futures contracts. must be earned as a performance bonus within a corporation rather than purchased. tracks the performance of an index of share returns for a particular country or industry sector.

E

Money market securities ____________. are short term pay a fixed income are highly marketablegenerally very low riskall of the above

E

Which of the following portfolio construction methods starts with asset allocation? Top-downBottom-up Middle-out Buy and hold Asset allocation

A

Which of the following is not a money market instrument? Treasury bill Commercial paperPreferred stockBanker's acceptance

C

A trader who takes a long position in a corn futurescontract has _______________ to ______________ a specified quantity of corn on the delivery date, at an agreed upon price. an obligation; buyan obligation; sell the right; sell the right; buy

A

A bond that has no collateral is called a _______________.debenturezero-coupon bond callable bond convertible bond

A

Money market securities are sometimes referred to as "cash equivalent" because _____. they are safe and marketablethey are not liquid they are high risk they are low denomination

A

Which one of the following is a true statement?Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investorsCommon dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stockPreferred stockholders have voting power Investors can sue managers for nonpayment of preferred dividends

B

Deposits of commercial banks at the Federal Reserve are called _____. bankers acceptancesfederal fundsrepurchase agreements time deposits

B

Which of the following is not a true statement regardingmunicipal bonds? A municipal bond is a debt obligation issued by state or local governments. A municipal bond is a debt obligation issued by the Federal Government. The interest income from a municipal bond is exempt from federal income taxation. The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

B

The maximum maturity on commercial paper is270 days180 days 90 days 30 days

A

A bond that has no collateral is called _________.a callable bonda debenturea junk bond a mortgage

B

A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.call optionfutures contract put option interest rate swap

A

Which of the following statements is true about initial public offering?An IPO is a secondary market transaction in the stock of a company that was formerly privately owned. Explicit costs of an IPO tend to be roughly 2% of the funds raised. IPOs have been shown to be poor long-term investments. Almost all IPOs turn out to be underpriced.

C

You sold short 200 shares of XYZ common stock at $40 per share. The initial margin requirement was 60%. Your initial investment was _______________.$3,200$4,800$6,000 $8,000

B

Advantages of ECNs over traditional markets include all but which one of the following? A. Lower transactions costsAnonymity of the participants Small amount of time needed to execute and order Ability to handle very large orders

D

Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.over priced correctly priced under pricedmispriced but without any particular bias

C

The inside quotes on a limit order book would be comprised of the ______. highest bid price and the lowest ask pricelowest bid price and the lowest ask price lowest bid price and the highest ask pricehighest bid price and the highest ask price

A

The _________ price is the price at which a dealer is willing to purchase a security. bid askclearing settlement price

A

A red herring becomes a prospectus when ____.the preliminary registration statement is approved by the SEC the IPO is complete the offering is seasonedthe lockup period expires

Purchases of new issues of stock take place _________.at the desk of the Fedin the primary marketin the secondary market in the money markets

B

An order to buy or sell a security at the current price is a ______________. limit order market orderstop loss order stop buy order

B

The controlling legal authority for a hedge fund is ________. Regulation T Rule 144AGlass-Steagall Act of 1933 Rule 12b-1 None of the above

E

A closed-end fund has a portfolio currently worth $350 million. The fund has liabilities of $5 million and 17 million shares outstanding. What is the net asset value of the fund? $20.88 $20.29 $20.59 $29.17

B

Which of the following result in a taxable event for investors? Short-term capital gains distributions from the fund II. Dividend distributions from the fund III. Long-term capital gains distributions from the fund I only II only I and II only I, II and III

D

Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the Net Asset Value (NAV) of these shares? $12.00 $9.00 $10.00 $1.00

B

Which of the following is not a type of managed investment company? Unit investment trusts Closed-end fundsOpen-end funds Hedge funds

A

Investors who wish to liquidate their holdings in a unit investment trust may ___________________. sell their shares back to the trustee at a discountsell their shares back to the trustee at net asset value sell their shares on the open market sell their shares at a premium to net asset value

Mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector, are called ____________________.asset allocation fundsbalanced funds index funds income funds

A

Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses, directly from the fund assets rather than billing investors. These fees are known as ____________.direct operating expenses back-end loads 12b-1 charges front-end loads

C

A mutual fund could spend its soft dollars without penalty on brokerage costs research to beat the marketthe bid-ask spread pillows for a manager's home.

The geometric average rate of return is ____________. also called the time-weighted average returnalso called the dollar-weighted average return equivalent to the internal rate of return an uncompounded rate of return

A

Suppose you buy a three-month Treasury bill with a $10,000 face value. The holding period rate of return for that three-month period will be two percent. What is the APR?2.00% 6.00% $200 8.00%

D

A risky portfolio has an expected rate of return of 15% and a standard deviation of 20%. The Treasury bill rate is 4%. What is the Sharpe measure for the portfolio?0.550.75 0.80 0.95

A

What is the real rate of return for an investment that has an expected nominal rate of return of 15% while the expected rate of inflation is 9%? 5.5% 6.0% 9.5% 10.0%

A

You purchased 100 shares of ABC stock for $20 per share. One year later you received cash dividends of $1 per share and sold the stock for $22 per share. Your holding-period return was _______________.5% 10% 15% 20%

C

Compute the geometric average of the following rates of return: 10%, -20%, -10%, and 20%: A) 0%-4.96%-1.26%0.95%

C

The face value of the Treasury bill maturing in one month is $20,000. You can buy it with a holding period return of one percent. The EAR for this investment is: 12.82% 12.68% 12.50% 12.00%

An investment has a 10% probability of earning a 20% rate of return, a 60% probability of earning a 10% rate of return and a 30% probability of losing 5%. What is the expected rate of return for this investment?-7.0% 9.5% 8.3% 6.5%

D

Portfolio diversification (i.e., each asset's weight is positive) provides benefits (i.e., portfolio minimum variance is less than any asset's variance) ______________.exist only when security returns are negatively correlated are always available, regardless of securities' correlation coefficientsexist whenever security returns are less than perfectly positively correlated are greater for positively correlated security returns than for negatively correlated security returns.

C

Katherine expects the market rate of return this year to be 12%. The expected rate on a stock with a beta of 1.2 is currently 14%. If the market return this year turns 10%, what is the revised expected rate of return on the stock?16.4%11.6%40.4% 12%

B

Two portfolio managers work for competing investment management houses. Each employs security analysts to prepare input data for the construction of the optimal portfolio. When all is completed, Manager A publishes an efficient frontier that dominates that of Manager B, in that A's optimal risky portfolio lies northwest of B's. Is Manager A's more attractive efficient frontier A evidence that she really employs better security analysts?Yes. The facts speak for themselves. Yes, but only because the results are published. Maybe. It depends on the name of the investment house.No. This is only advertising, not fact.No. Security analysts don't know anything.

You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be ________________. more than 18% but less than 24% equal to 18% more than 6% but less than 18% equal to 6%less than 6%

Iggy Marx, an investment manager, discovered that his managed portfolio returns were perfectly negatively correlated with the returns on gold. The means and standard deviations are, as follows:portfolio E(Rp) σ(Rp)Managed 0.40 0.20Gold 0.10 0.10What fraction of his portfolio value should be in gold to minimize the variance of return on his portfolio?

For a portfolio, assume that E(rP)=25%, rf=5%, and E(rM)=15%. What is the beta of this portfolio?2 1.5 1.92.9

A

Which of the following observation is true of the Security Market Line?It graphs the risk premiums of efficient portfolios. It is not valid for individual assets. It is also called the regression lineIts slope is the risk premium of the market portfolio.

D

Which of the following statements is relevant to the Arbitrage Pricing Theory?It assumes that arbitrage opportunities exist in abundance in well-functioning markets. The controversial assumption concerning how individual investors form their portfolios used in the CAPM is central to this theory also. A violation of its pricing relationships will cause extremely strong pressure to restore them only when a large number of investors become aware of the disequilibrium.Its central insight emerges by considering highly diversified portfolios for which residual risk may be effectively ignored.

D

The difference between the theoretical equilibrium and actually average rate of return on a stock is called the stock's _____.alpha betagamma delta

A

The expected return on a stock with a beta of 1.25 is 18%. If the expected risk-free return is 3%, what should be the market risk premium?16% 8% 12% 15%

B

All of the following are areas in which the capital asset pricing model (CAPM) can be used, except:investment management capital budgeting decisions in which the CAPM can provide the return the project needs to yield to be acceptable to investors utility rate-making cases predicting actual returns on a stock

D

Find the risk-free rate, given that the expected return on stock is 17.88%, the expected return on the market portfolios is 16%, and the beta for stock is 1.2.3.83% 4.99% 5.72% 6.6%

D

You invest $8,000 in stock A with a beta of 1.4 and $12,000 in stock B with a beta of 0.8. The beta of this formed portfolio is ______________.Investors have homogeneous expectations.Investors pay taxes on returns and incur transaction costs on trades in securities All investors form portfolios from a common universe of publicly traded financial assets.All investors plan for one identical holding period.

A

A stock has an estimated rate of return of 15.5% and a beta of 1.5. The market expected rate of return is 10% and the risk-free rate is 3%. The alpha of the stock is ___________-2%0% 2% 3%

C

10. Which of the following is an empirical rule concerning betas?They appear to regress toward meanThey are constant over time. They are always near zero. They are always positive.

A

According to the CAPM, overvalued securities should have ______________.large betas positive alphas zero alphas negative alphas

D

Which of the following is NOT an assumption in the development of the capital asset model?Investors have homogeneous expectations.Investors pay taxes on returns and incur transaction costs on trades in securities All investors form portfolios from a common universe of publicly traded financial assets.All investors plan for one identical holding period.

B

The mutual fund theorem states that ________.the presence of mutual funds precludes arbitrage opportunities in well-functioning capital markets it is difficult for the actual returns of a mutual fund to closely mirror the initial investor expectations in any particular holding periodall investors desire the same portfolio of risky assets and can be satisfied by a single mutual fund composed of that portfolio it is impossible to create a portfolio to represent all the relevant systematic factors in the economy.

C

In Fama and French's three-factor model, ______________ and ______________ are added to the market index to explain average returns.firm size; firm revenuesfirm size; book value to market value ratio firm sales; market value to book value ratio firm sales; firm cost of capital

B

Which of the following is a valid comparison between the CAPM and APT?The CAPM applies only to well-diversified portfolios. The CAPM dominates the APT and econometric concerns appear to favor it.The APT gets us to the expected return- beta relationship without requiring m the unrealistic assumptions of the CAPM. Both theories differ on the expected return- beta relationship.

C

Suppose that the strong-form EMH were correct. A group of 1024 investment managers, picked at random, begin a competition. Each year, the investment managers who perform worse than the median manager drop out of the group. After five years of this, how many managers would remain in the group?1 5 32 512 None of the above.

C

Suppose that you work for an organization that creates nonpublic information about a particular industry. You have learned that your boss is makinglarge profits, trading on this information. Which of the following is true?This is a violation of weak-form market efficiency. This is a violation of strong-form market efficiency.If Bernie Madoff did it, this would be a violation of insider trading laws. If your U.S. Senator did it, this would be a violation of insider trading laws. A and BB and CC and D E and F F and G

Suppose that the term structure is flat at a yield of six percent per annum, compounded semiannually. What is the value now of $1, received in three years?$1 / 1.063 = $0.8396$1 / 1.036 = $0.8375$1 / 1.029 = $0.8368 $1 / 1.092 = $0.8417 all of the above none of the above

B

Suppose that the term structure is flat at a yield of six percent per annum, compounded semiannually. What is the value now of a perpetuity of $1, paid every six months, starting in half a year?

Suppose that the term structure is flat at a yield of six percent per annum, compounded semiannually. What is the value now of an annuity of $1, paid every six months, starting in 3.5 years?($1 / 0.06) (1 / 1.063) = $13.9937 ($1 / 0.03) (1 / 1.063) = $27.9873 ($1 / 0.06) (1 / 1.036) = $13.9581 ($1 / 0.03) (1 / 1.036) = $27.9161 all of the abovenone of the above

D

Based on your answers to questions 1-3, what is the value of a three-year bond, with [par value of $1,000 and] a semiannual coupon at the rate of 4% per annum? (1,000 Par Value)_____________

???

What is the value of a 30-year bond with a 5% coupon and face value of $10,000 if the yield is zero?______________

$25,000

If the U.S. had hyperinflation of 100% per day, what would be the price of the bond in question five to the nearest dollar? Explain in one sentence._____________

0.00 - at such a high interest rate, the value of the first payment would be not even a penny. The whole bond is practically worth nothing

Which of the following bonds would have the largest price change when interest rates increase? Assume that the bonds each have the same yield to maturity.10-year maturity, 8% coupon rate 10-year maturity, 5% coupon rate 15-year maturity, 8% coupon rate 15-year maturity, 5% coupon rate

D

The estimated percentage change in the value of a bond derived from the duration rule is _____________.less than the actual price change when the yield decreases less than the actual price change when the yield increasesgreater than the actual price change when the yield decreases always greater than the actual price change

A

The sensitivity of a coupon bond's price to a change in its yield ____________. is directly related to the bond's yield to maturityis inversely related to the bond's yield to maturity is greater for increases in yield to maturity than it is for decreases in yield to maturityis the same regardless of whether the yield to maturity increases or decreases

B

An insurance company issues a guaranteed investment contract (GIC) with a ten-year maturity. The insurance company elects to fund this obligation with a coupon bond that also has a ten-year maturity. Therefore, the insurance company is subject to ____________ in the event that market interest rates increase and to ____________ in the event that market interest rates decrease.losses resulting from duration risk; losses resulting from price risk losses resulting from convexity risk; losses resulting from reinvestment rate risklosses resulting from reinvestment rate risk; losses resulting from price risk losses resulting from price risk; losses resulting from reinvestment rate risk

D

Dedication strategy is best described as:matching cash flows from a fixed-income portfolio. price yield relationship of a bond. multi-period cash flow matching.exchange of one bond for similar identical bond.

C

Rebalancing of an immunized bond portfolio is necessary ____________.only when market interest rates change because rebalancing incurs transaction costs because, as time passes, the duration of a liability can change at a different rate than the duration of an asset because, as time passes, the duration of liabilities generally decreases while the duration of assets generally increases

A graph in the shape of an inverted hockey stick with the bottom (which is on top) pointing toward right of page and at level 0 is the payoff function for a:long call struck at 50 long put struck at 50 short call struck at 50 short put struck at 50

D

A graph in the shape of a V with the point at level of 0 is the payoff function for a:long strip long strap long straddle long strangle short strip short strap short straddle short strangle

C

If you anticipated that a jury would decide a major lawsuit, either for or against GM by the middle of next March, and the forward price for GM on that March 25 were 50, you would want to buy with expiration at the end of next March.Payoff function: in shape of hockey stick with the bottom pointing towards left of page and at level 0Payoff function: shape of an inverted hockey stick with the bottom (which is on top) pointing toward right of page and at level 0in the shape of a V with the point at level of 0none of the above

C

A __________is the name for a combination of a long position in shares and a short call option position in those same shares, and a __________ is the name for a long position in shares and a long put option position on those same shares.A. American option B. at-the-money C. call option D. collar E. covered call F. European option G. exercise price H. in-the-money I. out-of-the money J. premium K. protective put L. put option M. risk management N. spread O. straddle P. strike price Q. warrant

E K

The hedge ratio of an at-the-money call option on Delta Corp is 0.80. The hedge ratio of an at-the-money put option is -0.70. What is the hedge ratio of an at-the- money straddle position on Delta Corp?0.1-0.10.5-0.5

A

In the Black-Scholes model if an option is likely to be exercised, both N(d1) and N(d2) will be close to ______. If the option is unlikely to be exercised N(d1) and N(d2) will be close to ______.1; 00; 1-1; 1 1; -1

A

Suppose that ABCD Corp.'s share price is $90.00, today. The riskless nominal rate of interest is 12.00%, compounded monthly. For simplicity the stock price moves just once a month, according to a binomial tree, and it could go in one month up to $99.00 or down to $81.82. A call option with a strike price of $90.41 expires in one month, and would be worth __________ if the underlying price went up, and $0.00 if the underlying price went down. The delta for that option would be __________. If you sold short that many shares and bought the call option on one share, in one month that position would have a net value of $___________ if the stock price rose and $______ if the stock price fell. The option would be worth $________, today.

99.00-90.41, 1/2, -40.91, -40.91, 4.50

You are sitting at your Bloomberg, looking at the market for options on Zeta Corp. Zeta is a young company that pays no dividend, because, management says, "Zeta has great growth opportunities for years." The last trade for Zeta shares was $50.48, one minute ago. You focus on the options with a strike price of K that expire in three months. You see that the call sells for $7.00 and the put sells for $9.00. The rate of interest is 4%, compounded quarterly. What is K, the common strike price of the call and put?$53$52$51$50$49

The gain or loss to the short side of futures contract that is entered at t and exited at T is _____ and the trader who is short receives that money at _____.F(T) - F(t) F(t) - F(T) S(T) - F(t) F(t) - S(T) T 0 various timest

G

A pension fund is has nearly matched its pension benefit obligations with its investments. What remains is $10 million of bond exposure with a modified duration of nine years.The managers are concerned that interest rates might rise enough that the asset value would no longer exceed the PBO. They are considering hedging away risk with a position in Treasury bond futures contracts. A Treasury bond futures contract has a notional amount of $100,000 principal, but taking a long or short position requires no investment, simply requiring margin that can earn interest. The bond futures price is $75 per $100 face value of the notional amount. The modified duration for the bond futures contract is ten years.The PV01 of the bond exposure is _____.A. $9000 B. $900 C.$90000 D. $90The PV01 of the bond futures contract is _____.The size in contracts of the bond futures hedge that eliminates the fund's exposure to a parallel shift in the yield curve is _____.

A, 75, 120

Suppose a bond's exposure were half as large, but its modified duration were twice as much. Calculate the number of futures contracts long (short) to hedge that exposure.

Nothing changes

Suppose the risk-free rate is 3.6% per annum, compounded monthly. The dividend yield on the stock index is 0.2% per month. The stock index is at S = 8000. The futures price on a contract with delivery in three months is approximately$8084.1 $8048.1 $8014.8 $8108.4

A graph in shape of hockey stick with the bottom pointing towards left of page and at level 0 is the payoff function for a:long call struck at 50 long put struck at 50 short call struck at 50 short put struck at 50